Q4 2022 Diodes Inc Earnings Call
Good afternoon, and welcome to diodes incorporated fourth quarter and fiscal 2022 financial results conference call.
At this time all participants are in a listen only mode.
At the conclusion of today's conference call instructions will be given for the question and answer session.
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As a reminder, this conference call is being recorded today Monday February six 2023.
I'd now like to turn the call over to Leann Sievers Shelton Group Investor Relations Liane. Please go ahead.
Good afternoon, and welcome to diodes fourth quarter 2022 financial results Conference call I'm Leanne Sievers, President of Shelton Group diodes Investor Relations firm.
Joining us today from Taiwan are diodes, Chairman President and CEO . Dr case, you lose Chief Financial Officer, Brett Whitmire, Senior Vice President of worldwide sales and marketing Emily Yang Senior Vice President of business groups scare you and director of Investor Relations could meet the Holywell.
Before I turn the call over to Dr. Lee I'd like to remind our listeners that the results announced today are preliminary and there are subject to the company's finalizing its closing procedures and customary quarterly review by the company's independent registered public accounting firm.
As such these results are unaudited and subject to revision until the company files. Its Form 10-K for its full fiscal year ending December 31st 2022.
In addition, management's prepared remarks contain forward looking statements, which are subject to risks and uncertainties and management may make additional forward looking statements in response to your questions.
Therefore, the company claims the protection of the Safe Harbor for forward looking statements that is contained in the private Securities Litigation Reform Act of 1995.
Actual results may differ from those discussed today and therefore, we refer you to a more detailed discussion of the risks and uncertainties in the company's filings with the Securities Exchange Commission, including forms 10-K and 10-Q in.
In addition, any projections of the company's future performance represent managements estimates as of today February six 2023.
This assumes no obligation to update these projections in the future as market conditions may or may not change except to the extent required by applicable law. Additionally, the company's press release and management statements. During this conference call will include discussions of certain measures and financial information in GAAP and non-GAAP terms included in the company's press release.
Vince and reconciliation of GAAP to non-GAAP items, which provide additional details.
Also throughout the company's press release and management statements. During this conference call. We refer to net income attributable to common stockholders as GAAP net income.
For those of you unable to listen to the entire call at this time, a recording will be available via webcast for 90 days in the Investor Relations section of diodes website at Www Dot diodes Dot com and now I'll turn the call over to diodes, Chairman President and CEO , Dr. Kashi Lindsey Dr. Lu. Please go ahead.
Thank you Dee Ann.
Welcome everyone.
Thank you for joining us today.
I'm pleased to report record performance in 2022.
Revenue grew 10, 8% over 2021.
Even considering the COVID-19 related stuff done and the power outage.
Oh the yield.
Well actually the global economic slowdown.
It would affect the fourth quarter represented our ninth consecutive quarter of year over year group.
Additionally.
And then power and cash generation in 2022.
We will also civic injury.
It was gross margin expansion 422 basis points to 41, 3%.
Operating margin expanded 510 basis points to 24%.
Good.
P S increased 44% to $7.20.
non-GAAP EPS.
And 42% to seven Donna and 36 range.
We also achieved record full full braking.
300, and the 19 $2 million.
Under him in the companies with no see performance.
Continued strong growth in our automotive end market.
Please 40% over 2021 and to reach 15% of all our revenue for the year.
We also continue to drive growth in our industrial and market through our ongoing content expansion.
Yes.
For each contributed to our industrial and automotive.
Market represent 42% of quarterly revenue.
Exceeding our target model.
40%.
The growth in those markets combined with the ongoing increased Oh, Oh he'll come Florida.
Also contributed to our strong gross margin expansion.
Throughout the year.
Although our product mix improvement.
Reaching the $2 billion of Iranian table in Tucson, and could lead to well it's.
Denise pen and the meaningful achievement of entire Tayo team.
We the book appropriately O N E.
3% to $897 million what have you.
We have taken a lot of change step toward next goal in our Tucson and quantified financial targets.
To achieve $1 billion in annual growth Paul.
I'm very proud of our accomplishment and our ability to consistently deliver both top line growth and significantly expanded our NIM.
And for our shareholders.
With that.
Let me now turn the call over to Brett to discuss our fourth quarter and the full year financial result.
And our first quarter 2023 guidance in more detail.
Yeah.
Thanks, Dr Lu and good afternoon, everyone.
Revenue for the fourth quarter, 2022 was $496 $2 million, increasing three 3% from $480.2 million in the fourth quarter 2021.
And down 4.8%.
From the $521.3 million in the third quarter 2022.
Full year 2022 revenue grew to a record $2 billion, an increase of 10.8% over the $1.8 billion in 2021.
Gross profit for the fourth quarter was $206 $2 million or 41, 6% of revenue increasing from $197 million or 39, 7% of revenue in the prior year quarter and down from 217.
$8 million or 41, 8% of revenue in the prior quarter for the full year GAAP gross profit was a record $827 $2 million, a 23.4% increase over 2021.
And GAAP gross margin improved 420 basis points to a record 41, 3%.
GAAP operating expenses for the fourth quarter were $109.7 million or 22.1% of revenue and on a non-GAAP basis were $105.9 million or 21.3% of revenue, which excludes $3 $8 million.
The amortization of acquisition related intangible asset expenses. This compares to GAAP operating expenses in the fourth quarter 2021 of $104 $7 million or 21, 8% of revenue and then the third quarter 2022 of the $105 4 million.
Or 22% of revenue.
non-GAAP operating expenses in the prior quarter were $101.3 million or 19, 4% of revenue.
Total other expense amounted to approximately $1.7 million for the quarter consisting of $490000 of other income.
$2.9 million in interest expense.
400000, dollar foreign currency loss and $1 $1 million of interest income.
Income before taxes, and Noncontrolling interest in the fourth quarter, 2022, with $94.8 million compared to $108 $8 million in the prior year quarter and $109 $1 million in the previous quarter.
Turning to income taxes, our effective income tax rate for the fourth quarter was approximately one 5% which includes taxes related to non-GAAP items.
On a non-GAAP basis, the tax rate for the fourth quarter was approximately 18.7% and for the full year 2022, the non-GAAP tax rate was approximately 18, 5%.
GAAP net income for the fourth quarter, 2022 was $92 $1 million or $2 per diluted share compared to $65 $5 million or $1.43 per diluted share in the fourth quarter 2021 and.
$86 $4 million or $1.88 per diluted share in the third quarter 2022.
For the full year 2020 to GAAP net income was a record $331.3 million.
Or a record $7.20 per diluted share, which was approximately 45% increase from the $228 $8 million or $5 per diluted share in 2021.
The share count used to compute GAAP diluted EPS for the fourth quarter 2022 was $46 1 million shares and 46 million shares for the full year.
non-GAAP adjusted net income in the fourth quarter was $79.6 million or $1.73 per diluted share, which excluded net of tax $3 $1 million of acquisition related intangible asset cost.
This compares to $73.3 million or $1.60 per diluted share in the fourth quarter, 2021, and $92 $2 million or $2 per diluted share in the prior quarter.
For the full year non-GAAP adjusted net income was a record $339 million or a record $7.36 per diluted share an increase of approximately 43% from the $237 $2 million or.
$5 at 18 cents per diluted share in 2021.
Excluding non cash share based compensation expense of $7.6 million net of tax for the fourth quarter and $28.7 million for the full year, both GAAP earnings per share and non-GAAP adjusted EPS would have increased by 16.
<unk> 16 cents and 62 cents per diluted share respectively.
EBITDA for the fourth quarter was $129.6 million or 26.1% of revenue compared to $139 million or 28, 9% of revenue in the fourth quarter 2021 and.
$141.9 million or 27, 2% of revenue in the prior quarter.
We had a gain on investment in the fourth quarter of 2021 that benefited EBITDA in that quarter for the full year EBITDA improved 19, 7% to a record $524 million or 26% of revenue compared to 434.
$6 million.
Our 24.1% of revenue in 2021.
We have included in our earnings release, a reconciliation of GAAP net income to non-GAAP adjusted net income and GAAP net income to EBITDA, which provides additional details.
Cash flow generated from operations was $102 $9 million for the fourth quarter.
And a record $392.5 million for 2022.
Free cash flow.
It was $39 $1 million, which included $63 $8 million for capital expenditures and for the full year free cash flow was $180.8 million, including $211.7 million for Capex.
Net cash flow was a negative $44.7 million, including the pay down of $114.1 million of total debt.
And for the full year net cash flow was a negative $25 $7 million, which includes the net pay down of 112.3 million of total debt.
Turning to the balance sheet at the end of the fourth quarter cash cash equivalents restricted cash plus short term investments totaled approximately $348 million.
Working capital was $729 million in total debt, including long term and short term was $186 million.
In terms of inventory at the end of the fourth quarter total inventory days were approximately 117 as compared to 113 last quarter finish.
Finished goods inventory days were 33 compared to 32 last quarter.
Total inventory dollars decreased $14.5 million from the prior quarter to approximately $363 million total inventory in the quarter consisted of $12 $1 million decrease in finished goods of $3 $2 million decrease in.
Raw materials, and a 0.7 million dollar increase in work in process.
Capital expenditures on a cash basis were $63 $8 million for the fourth quarter and for the full year, approximately $211.7 million or 10, 6% of revenue.
Full year Capex was higher than our target model due to targeted expansion of our J K wafer fab and since you Science Park in Taiwan.
Without this investment we would have been within our target model of 5% to 9% and we expect to remain in this range. This year.
Now turning to our outlook for the first quarter of 2023, we expect revenue to be approximately $467 million plus or minus 3% gas.
GAAP gross margin is expected to be 41.0% plus or minus 1%.
Even with the revenue and loading decrease in the first quarter, we expect to maintain our gross margin effectively comparable to the last quarter and above our target model of 40% non.
non-GAAP operating expenses, which are GAAP operating expenses adjusted for amortization of acquisition related intangible assets are expected to be approximately 22.2% of revenue plus or minus 1%. We expect net interest expense to be approximately $2 5 million.
Our income tax rate is expected to be 19% plus or minus 3% and shares used to calculate EPS for the first quarter are anticipated to be approximately $46 5 million.
Not included in these non-GAAP estimates as amortization of $3 1 million after tax for previous acquisitions with that said I'll now turn the call over to Emily Yang.
Thank you Brett and good afternoon.
Dr. Lu and Brett mentioned 2022 was a record year for diodes across all financial matrix.
Fourth quarter revenue was down four 8% sequentially, which is above our midpoint of our guidance and slightly better than our typical seasonality looking more closely at the fourth quarter revenue P. O Ashworth record in Europe distributor inventory in terms of weeks increased quarter over quarter, which is higher than that.
Normal define normal range of 11 to 14 weeks. This increase is due mainly to demand softness in China related to Covid and our anticipation of COVID-19 covering Q2, as well as our anticipation of labor shortage around Chinese new year, we position more product to minimize the potential impact.
And quick response once the market recovers.
The men and backlog remains stable across all regions, especially for automotive industrial end markets.
Looking at our global sales in the fourth quarter Asia represented 73% of revenue, 15% in North America, 12%.
In terms of our end market industrial represented 28% of diodes product revenue contributing 23% consumer 18% communications watching attrition in our automotive end market reached a record 17% of the product revenue, our automotive and industrial end market combined.
Total, it's 45% of product revenue for the quarter, which is five percentage points above our 2025 target and about 40% for the fourth consecutive quarter. This demonstrates <unk> ability to quickly adjust our capacity allocation from low N P C consumer and smartphone.
Nice to have high demand end markets like automotive industrial now let me review the end markets in greater detail.
Our automotive market continued to be a highlight for both of them.
And our full year staffing revenue record for <unk>.
<unk> consecutive quarter and growing 40% in 2022.
Consistent strong growth in this market can be contributed to our ongoing demand creation efforts as well as market share gains across new and existing customers. Our design win momentum continued in our three application focus areas all connected driving Congress diodes safety and electrification.
In connected driving we continue to see increased interest for our USB type C. We try first and a lot of switches style controllers L. D. L. D. C. D. C bus converters dinar dialed in Tvs, Yes, Indeed, we all see entertainment Adas infotainment smart carpet telematics and instrument cluster applications.
We also saw increased these tightening quite a video switches used any P displayport and USD switches and telematics communications system by multiple customers.
Copper started and safety are linear led drivers and D. C. D. C. Congratulations would be fine into next generation L. E D lighting application.
Our sensors business close and I think I mean, judging by application, including electronic steering control locked me fielding calpers window mixtures and walking pumps high voltage switching diodes and he's a guy who's also grew in the quarter, primarily in the air quality sensors and HVAC applications Becker of R. F.
B, our automotive product would be sign into battery power electric vehicles and plug in hybrid vehicles for automotive safety applications. We also secured a number of new design wins, so yes E charging controllers like India Coke must be charging devices.
Lastly, in the electrification, our 32 bit Isle expense there as.
What do you sign into EV vehicles control unit and our T V. S product you sign into high speed data lines Hawaii.
Electric vehicles are protection products also have strong growth in applications, including.
Battery control onboard diagnostics.
Additionally, we ramp up our MOSFET product multiple new applications across several different customers, while releasing a number of low voltage MOSFET products for the battery management system, a Wi Fi application.
In our industrial market revenue off of that all the records, representing the sixth consecutive quarter of outgrow.
Our PCI Express three Oh package, which continue to gain traction and industrial automation applications as they enable enhanced performance by connecting Soc's Cpus to the endpoint. Additionally, our high voltage industrial Iot devices excuse me, it's very strong demand for the smart.
Similarly, our L E D controllers spend up in the L. E D power supply what power industrial commercial al you see lighting and our industrial sensor business continued to gain traction empowered to air condition, you see motorists and the washing machine application.
Additionally, we continue to secure design wins for our C. I S profit in eight O I applications like gathering film PCB wafer inspection and check scanners also our switching diodes.
Last week, California, ratify L. E D. Dry foods has been helping two part question Maher Eustachian Green factory automation applications, including E P.
Metering industrial sensors cameras scanners elevators and image processing equipment.
With SBR products also being widely used in power or if are you setting up well and MOSFET subtraction, new power application.
In the computing market, despite the softness in lower N. P. C application our momentum for SBR T V. S. MOSFET and current monitoring product continue in the notebook and tablet designs, we secured numerous design wins for ice cream he switches at the Boston level Shifters MLR switching.
I O expand there seem to be asking the club surfer protection applications. Additionally, R. E. D. T V drivers E T. Marc and 20 gigabit per second D. Teach you about all the drivers are being adopted in the gaming notebooks and at in graphic card application.
In the communication market, our USB type C audio switches I O Expanders MOSFET and hockey fans switches continue to be designed into a serious of smartphone devices well how are you.
The drivers would be say into mobile phone peripheral products, including wireless Chargers also our schottky product with deciding to fight your Wifi application and we continue to see traction for our PCI Express clock offerings family, If I G. C. P. <unk> P b S product and networking applications.
Lastly in the consumer market, we saw increased adoption of our 12 state high speed, marking the embedded multimedia card modular and our current limit power switches continue to see solid demand from USB power applications and gaming console or eight thought well why can't gigabit phy the rationale.
<unk> will also adopt a cable applications and our Tvs protection Provost USB switches SBR C. S. P products USB power delivery date holders would define interest of Cherokee Keith Sports camera next generation TV, where both in Portugal as well as.
What Monte USB C power socket application.
In summary, diodes achievement of record results in 2020 to once again highlight the ongoing success of our customer expansion initiatives as well as our focus on product mix improvement towards higher margin products and end markets to drive increased profitability.
Our significant expansion and growth in the automotive and industrial end market is a direct result.
Jay action, we look forward to Florida, expanding our momentum and continue to progress in the coming year.
With that we now open the floor to questions operator.
Thank you very much we will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
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At this time, we will pause momentarily to assemble our roster.
Okay.
Today's first question comes from William Stein with Cubist. Please go ahead.
Great. Thank you for taking my question.
I'm, hoping you can review the channel inventory trends again, I think you.
Mentioned it briefly in the prepared remarks.
Uh huh.
I just want to.
I want to hear the clarification as to what happened in the channel in the quarter.
What you expect will happen in the current quarter and distribution. Thank you.
Hi, This is Emily let me answer this question right. So I did mention the channel inventory was up quarter over quarter, it's a little bit higher than our normal range at this moment, but with I mean, but mainly reason due to that change is actually a couple of things, we definitely see a china softness during the cold.
You know in the fourth quarter and then we also have an anticipation of a recovery from some of that like three fees that we talked before you know if they start to some of the channel inventory or inventory rebalancing for the last few quarters. So there's anticipation of that recovery as well as others.
Labor shortage during the Chinese.
Chinese new year timeframe, so with all this dynamic situation combined so we actually also stretchy Jamie increase some of the channel inventory so that way, we can better support our customers last minute or demand change.
Great. Thank you and.
Can you talk about your outlook by end market for for the coming quarter.
Yeah sure.
I think automotive, we're still seeing a lot a lot of strength overall.
So our pipeline continues to grow our engagement continue to and rich and if I just look at.
The whole year or quarter over quarter comparison, automotive still a record quarter for us by the end of Q4, and if we look at a whole year year over year growth still 40% plus right. So that's really really exciting and then industrial I think it's a little bit of mix there are certain applications softer.
The others, we also see some inventory rebalancing going on but when we take everything together I would say steel are really stable are you know end market at this moment and then computing and we talk about it you know inventory rebalancing property started breaking out Q3 last year. So we still see a softness.
What's going on but we also like I mentioned, there is the anticipation of.
Recovery in probably in a quarter or two right.
We're still seeing some softness, especially from the China market.
And then on the communications side.
Smartphone I think still a inventory rebalancing is still ongoing but again right. So once they get to a certain level, we do expect some recovery.
It sounds like an ongoing it sounds like a similar trend in the coming quarter or relative to what we've seen over the last quarter or two.
If we see if we can.
That's correct, we shouldn't shouldn't interpret any divergent performance or any pivot in.
In Q1 relative to what we've seen in Q4.
Yeah. So I would say there's no significant change from the end market point of view, but the key thing for US is continue to focus on our product mix improvement right continue to leverage our capacity to lower the support for the slow end markets and focus supporting the strong demand.
End markets like automotive as well as industrial applications right.
Great I'll get back in queue. Thank you.
Okay.
The next question comes from Matt Ramsey with Cowen. Please go ahead.
Hi, This is Josh buchalter on behalf of Matt Congrats on the stellar results and thank you for taking my question I wanted to follow up on Will's question. So if I'm understanding correctly the channels running above their typical 11% to 14 week range and so yeah, I know, you're taking factory loadings down but does that mean.
You're sort of comfortable running above the typical range for a little while in anticipation of the recovery I just want to make sure I'm understanding correctly. Thank you.
Yeah.
Josh you know I did mention a little bit earlier right. There's still a lot of dynamic situation going on with the labor shortage during the Chinese new year.
The auto softness due to the COVID-19, especially in China as well as anticipation of some recovery probably around the Q2 hotter. So with all this culmination of the situation. We are actually okay with the inventory channel inventory higher than I do.
Find in normal range. The other angle, we look at is the quality of the inventory right. So it's not only about the number of weeks on the shelf as also the quality of the product on the shelf. So you know we actually feel very confident.
And behind the numbers.
Okay understood. Thank you.
And I guess for my follow up I wanted to ask about gross margins. It is.
It sounds sort of only marginally despite two straight quarters of mid single digit revenue declines.
It sounds like lower factory loadings as well.
Could you walk through what's driving so much resiliency on your gross margin line is it mix shift between end markets or products continued strength in the pricing environment any color there would be super helpful. Thank you.
Yeah, that's what really it's a really good question right. So if you look at our you know for the last few years, we really emphasize on two things one is actually the total solution itself. The second thing is really product mix.
Initial test or improvement overall right. So we opened they talk about automotive industrial is a key focus for us and if you look at the result, right I've mentioned earlier, just the automotive we achieved 40% year over year growth and then what things are you know from 2013 to $20.
'twenty two we combined annual growth rate more than 30%. So definitely it's it's a great success and the consistency is actually Oh definitely worth mention I think with industrial again is actually our biggest and then by the end of Q4 is actually 28% of our total.
<unk> and market out of the products right, so with the auto and industrial combined based on the Q4, but you saw its actually 45% of our total revenue even with the whole year.
<unk> represented 42%. So you know we openly talk about by the end of 2017, we provided a guidance what the sentiment is actually we want to achieve about 40% as you can see we have fourth quarter consistently above this target so again, but.
That's just a really good demonstration of the product mix improvement initiative and the other for example, its actually pair com product family right. So we've been talking about at the margin of all its really really attractive and again, we consistently deliver.
The growth of this market our product segments right. So with the combined you can actually see even with the revenue guidance slightly down a rough seasonality for Q1, but our margin guidance what are your 1% still significantly higher well higher than our two.
Searching model that we established a 40%. So I hope you can actually see this is actually a really strong demonstration of our focus of product mix improvement of course, it coupled with our manufacturing efficiency, which is always the strength of the company. So I think with all combined together.
Actually confident that we are on the right track and bright path towards our 2025.
Ill defined goal, which is 1 billion gross profit and $2 5 billion our revenue model right. So.
That's super helpful and congratulations again on the results.
As a reminder, if you have a question. Please press Star then one.
The next question comes from David Williams with Benchmark Company. Please go ahead.
Yeah.
Yeah.
David Your line is open.
Okay.
Okay.
Once again, David Your line is open.
Yeah.
Seeing no further questions in the queue. This concludes our question and answer session I.
I would like to turn the conference back over to Dr. Lu for any further closing remarks.
Okay.
Thank you for your participation on today's call.
Operator, you may now disconnect.
Thank you. The conference has now concluded. Thank you for attending today's presentation you may now disconnect.